Bonitas Research Shorts Huazhu Hotel, Claiming It Inflated Profits

Consumer Staples Author: Yue Liu Editor: Luke Sheehan Sep 22, 2020 05:10 PM (GMT+8)

The report was released on the company's first day of trading on HKEX.

Image credit: Ciudad Maderas/Unsplash

On September 21, the short-selling institution Bonitas Research released a report claiming that Huazhu concealed operating expenses and inflated profits. As of the close of the US stock market, its shares declined 3.66%. However, Huazhu Hotel H-shares rose by 4.71%, with market value exceeding HKD 100 billion.

The report stated that the registration information of the Ministry of Commerce of China shows that, as of 2019, Huazhu had 3,020 independent franchisees, which was 37% less than the 4,930 franchise hotels reported by Huazhu; the hotel operating license shows that Huazhu secretly controls 1952 hotels, but it claimed to operate 688 hotels as of 2019. Besides, compared with the State Administration for Industry and Commerce data, the number of employees that Huazhu reported to the US Securities and Exchange Commission was at least 16% less.

Therefore, Bonitas Research believes that Huazhu used undisclosed employees and franchised hotels owned by undisclosed related parties to conceal operating expenses, thereby fabricating profits. They also calculated that, on the balance sheet of 2019, Huazhu's false profits represented a false PP&E of CNY 2 billion.

Huazhu responded that "the company believes that the report is unfounded, it contains many false, unsubstantiated statements and misleading conclusions about the company's business and operations."

The company has been severely affected by the epidemic, but currently, Huazhu's performance is recovering. The net loss attributable to the company in the second quarter narrowed by 74% compared with the previous quarter. The expansion plan has not stopped, with a net increase of 234 hotels in the second quarter, which puts higher requirements on Huazhu's cash flow. Whether the Hong Kong stock market can become the right financing channel is still uncertain after the short-selling report.